Discharging Student Loans -- the Unicorn of the Bankruptcy World?

I attended a free student loan webinar in March of 2014 entitled "Student Loans: The Next Big Thing for the Collection Industry." I'm not a collection lawyer but I wanted to see what collection companies were saying about my student loan clients. I submitted a written question during the webinar asking what percentage of student loans face a discharge in bankruptcy and received this response:

Bankruptcy discharges of student loans are the unicorn of the bankruptcy world

I thought it telling a student loan collector would compare the discharge of student loans in bankruptcy to a mythical creature no one ever sees. I couldn't think of a better metaphor to explain why collectors believe they can afford to be arrogant in collecting on student loans. Unlike mortgages, credit cards, and IRS debt, student loans will never be automatically discharged in a bankruptcy. A separate lawsuit is necessary requiring a borrower to engage in litigation against the Department of Education, an organization noted for taking intransigent positions even in marginal cases. Outspending an impoverished litigant is a familiar collection tactic.

I was reminded of this assessment while listening to oral arguments in Murphy v. Department of Education at the Federal First Circuit Court of Appeals in Boston on December 10th. He represented himself until recently provided pro bono representation because he could not afford a lawyer. This case has national implications, prompting the National Consumer Law Center and the U.S. Department of Education to submit amicus briefs and appear at oral argument.The dispute revolves around what Congress meant when it said a borrower had to prove "undue hardship" in order to discharge student loans in bankruptcy. Murphy, unemployed and now age 65, owes more than $250,000 in Parents Plus loans to put his children through school. At his bankruptcy meeting, the trustee told Mr. Murphy he was more likely to be hit by a bus than have his student loans discharged. Indeed, after listening to the Department of Education's lawyers argue at yesterday's hearing, the trustee may have gotten it right -- at least if the Department of Education has its way.

The Department of Education's position reduced to its essence is that if Mr. Murphy can qualify for a payment plan he should never be able to qualify for a bankruptcy discharge. Judge Thompson pointed out a debtor would never be entitled to a discharge if the government's position were accepted as this would effectively read a student loan discharge out of the Bankruptcy Code. Citing the hypothetical possibility Mr. Murphy could earn $30,000 to $40,000 per year in the future, the government argued the court should ignore the fact Mr. Murphy was earning nothing now, and at age 65 had been unemployed for several years. The government claimed it was not requiring a "certainty of hopelessness" as a prerequisite to a student loan discharge, part of the archaic Brunner test used by some courts. The Department of Education offered no explanation for its optimistic assessment for Mr. Murphy's future employment opportunities beyond age 65. Judge Lynch was particularly hostile towards Mr. Murphy's position even though the government admitted Mr. Murphy and his family were facing a foreclosure and his wife's income was woefully inadequate to meet minimal living expense. Judge Torruella did ask the Department of Education attorneys at one point if being unemployed at age 65 with no job offers in the future was not enough, what more should be required. After fumbling for a response, causing Judge Thompson to repeat the question to muted laughter, the government finally pointed out Mr. Murphy is in good health and might continue to work for another 15 years. The government failed to explain why it believed working until age 80 was a realistic scenario.

The government could not dispute Mr. Murphy's present financial difficulties so its strategy was to point out how some future scenario might permit him to repay his student loans. Crystal ball gazing to construct future scenarios invites enough uncertainty that borrowers find it difficult to prove a negative. Given the Obama admininstration's professed interest in helping struggling student loan borrowers, this was a sad performance. This is a three judge panel, however, a split decision appears to be a best case scenario for Mr. Murphy.

The above is not intended as legal advice for your particular situation. Questions should be addressed to student loan attorneys admitted to practice within your state. Richard Gaudreau is a lawyer admitted to practice in New Hampshire (NH) and Massachusetts (Ma) with a specialty in bankruptcy and student loans. He has litigated student loan issues in the U.S. Bankruptcy Court, First Circuit Bankruptcy Appellate Panel, and Federal First Circuit Court of Appeals. He may be reached through his website at attorneygaudreau.com, by email at Richard@attorneygaudreau.com, or by calling 603-893-4300.